Investment Lessons of 2016

2016 was a wild ride!

What if, at the start of the year, you had a crystal ball and you knew January and February would see severe stock market declines leading to the worst start of any year, Britain would shock the financial markets by voting to exit the European Union, and Donald Trump would be elected President?

Would you have changed anything? Would you have sold all your stocks for the safety of bonds?

If you had, you would have traded some spectacular gains in the stock market for losses in the bond market!

After the decline in January and February, all asset classes had turned positive by May.

But this didn’t last. By late November, some safe-haven asset classes like Bonds and Gold tumbled while others like Stocks soared.

However, by the end of December, pretty much everything turned positive again.

S&P 500 ended up 12%

Mid-cap stocks up 11.2%

Small-cap stocks 18.4%

US Bonds 2.5%

Emerging Market Bonds 16.7%

High Yield Bonds 29.6%

US Real Estate 8.6%

Foreign Real Estate 0.32%

Developed Market Stocks 2.7%

Emerging Market Stocks 10.7%

Gold 8.3%

Gold Mining Stocks 48%

Commodities 17%

We use a Value and Quality index fund for our exposure to US Large-cap stocks and this year it had a terrific return of 21.9%. Value and Quality doesn’t always outperform and market-cap weighted index (such as SPY), but when it does, the returns are very satisfying.

(As per my compliance officer, I must mention here that past performance does not guarantee future returns, and investor returns may be lower due to transaction costs and fees, as well as timing of deposits and withdrawals).

Overall, all of our equity-based globally diversified portfolios returned between 9.9% and 13% (before the impact of fees) in 2016.

The worst performer was the Municipal Bond portfolio, returning a modest 2.2% (again, before fees). This was unexpected, due to the sudden spike in interest rates. However, Municipal Bonds are currently an extremely good value, and I believe they will have a much better performance in 2017 even if interest rates increase slightly.

The biggest takeaway from 2016 is the behavior and returns of financial markets are impossible to predict.

Rather than focusing on market timing, you’re much better off sticking to your long-term investment strategy and process. If you don’t have a process, you’re  more likely to be swayed by your emotions when confronted with the roller-coaster ride of the markets.

As for 2017, it’s hard to predict what’s in store for us.

But you can be sure that it will be just as volatile and equally unexpected. So instead of worrying about it,  we’ll continue doing what we’re doing and reaping the rewards of a long-term process-driven investment strategy.

Wish you all a very Happy and Prosperous New Year!

Nirav

P.S: If you’d like to discuss your investment performance, or you’d like a complimentary portfolio review, just reply to this email and we’ll schedule a time to talk.